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ABM Industries: Riding The Wave Of Return-To-Office Trends

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Three businesswomen stepping done an agency successful nan morning

Three businesswomen stepping done an agency successful nan morning

jacoblund/iStock via Getty Images

Thesis

ABM Industries (NYSE:ABM) has seen anemic maturation successful its main conception complete nan past 3 quarters. However, I judge it is group for a betterment owed to 3 cardinal hypotheses:

  1. ABM will use from a crisp services rebound
  2. Return to agency trends will reignite growth
  3. ABM is attractively weighted astatine a discount to peers

ABM will use from a crisp services rebound

Being successful nan accommodation guidance services manufacture pinch 94% of revenues generated successful nan United States, ABM is geared towards nan wellness of nan US services industry. The Institute of Supply Management's Services PMIs are known to beryllium starring indicators for nan services sector:

US Services (Non-Manufacturing PMI)

US Services (Non-Manufacturing PMI) (TradingView, Author's Analysis)

In January 2023, nan Services PMIs rebounded from contraction backmost into maturation territory arsenic it moved from 49.2 to 55.2. The Business Activity/Production and New Orders sub-indices are further starring indicators of nan wide Services PMI. These indices showed an moreover sharper rebound from 53.5 to 60.4, and 45.2 to 60.4 respectively. This increases my assurance successful continued beardown maturation successful nan services manufacture ahead.

I judge ABM will beryllium capable to seizure its adjacent stock of this growth. According to Fortune Business Insights, nan accommodation guidance marketplace is expected to spot a maturation acceleration successful nan years ahead:

Facilities Management Market

Facilities Management Market (Fortune Business Insights, Author's Analysis)

A cardinal structural maturation driver for nan maturation acceleration is accrued outsourcing penetration of janitorial services. According to a 2022 In-House/Facility Management Benchmarking Survey Report by Cleaning and Maintenance Management Magazine, outsourcing of cleaning and janitorial services increased from 26.3% to 29.9% successful 2022.

Another awesome maturation driver includes a return to nan office:

Return to agency trends will reignite growth

Business & Industry gross QoQ growth

Business & Industry gross QoQ maturation (Company Filings, Author's Analysis)

ABM's Business & Industry conception is nan largest conception making up 51.2% of revenues successful Q4 FY22. As nan floor plan supra shows, this conception has seen slower QoQ maturation complete caller fewer quarters. Management attributed this to debased agency occupancy rates successful nan net call. The information matches their commentary:

Office Vacancy Rates successful nan US

Office Vacancy Rates successful nan US (Statista, Commercial Edge, Author's Analysis)

Q4 CY22 saw a crisp summation successful agency vacancy rates successful nan United States to 16.6%. However, I fishy that is an overstated and perchance impermanent phenomenon. I statement that nan mostly of tech-layoffs started successful Q4 FY22, which whitethorn explicate immoderate portion of nan spike successful little vacancy rates.

It is difficult to judge that higher agency vacancy rates and hence little agency occupancy rates is owed to accrued work-from-home (WFH) trends because eclectic pieces of grounds shows that nan momentum is successful nan other direction; group are returning backmost into nan office.

According to Commercial Real Estate investigation patient CoStar, aft nan layoffs, ample exertion companies are reversing distant activity policies to person tighter checks and balances connected worker productivity. As CoStar journalist Katie Burke noted:

If 2021 was nan twelvemonth of operating remotely and 2022 nan twelvemonth of trying to easiness labor backmost to in-person work, existent property professionals opportunity nan adjacent 12 months are expected to characteristic companies investing successful semipermanent existent property decisions arsenic they begin requiring much accordant agency attendance.

(Author's bolded emphasis)

ABM's CEO Scott Salmirs called retired nan aforesaid inclination successful nan Q4 FY22 net call:

And I could conscionable show you anecdotally, arsenic I recreation successful my circles and talk to immoderate adjacent CEOs, there's decidedly a push to get group backmost to nan office.

Importantly, location is grounds that these commentaries are materializing into existent changes successful behavior. For example, installation information patient Kastle noted that successful January 2023, agency occupancies person rebounded to 50% for nan first clip since nan pandemic successful March 2020.

All this gives maine assurance that agency occupancies are connected an uptrend, which makes ABM's Business & Industries conception poised for reignited growth.

ABM is attractively weighted astatine a discount

LTM EV/EBIT Peer Valuations

LTM EV/EBIT Peer Valuations (Company Filings, Capital IQ, Author's Analysis)

Peer group includes Fluor Corporation (FLR), AECOM (ACM), EMCOR Group (EME), BrightView Holdings (BV), KBR (KBR), Tetra Tech (TTEK), MasTec (MTZ), SP Plus Corporation (SP), Jacobs Solutions (J), Mitie Group (OTCPK:MITFF) (OTCPK:MITFY), Newmark Group (NMRK), Target Hospitality Corporation (TH), CBRE Group (CBRE), Jones Lang LaSalle (JLL), Cushman & Wakefield (CWK), Rollins (ROL), Aramark (ARMK) and Sodexo (OTCPK:SDXOF) (OTCPK:SDXAY)

The bolded names supra see competitors of ABM Industries, arsenic identified by mentions successful nan respective companies' root filings.

ABM Industries presently trades astatine a 13.1x LTM EV/EBIT multiple, which implies a 26.7% discount to 17.8x median aggregate of nan work guidance adjacent set.

Relative to its humanities trading mean too, ABM is trading astatine 1-yr guardant PE aggregate of 13.9x; a 17.2% discount to its semipermanent mean of 16.7x:

ABM Industries 1-yr guardant PE

ABM Industries 1-yr guardant PE (Company Filings, Capital IQ, Author's Analysis)

I judge a return to nan semipermanent PE of 16.7x is feasible, particularly fixed nan mean-reversion backmost toward nan agency and an impending roaring rebound successful nan US services sector, arsenic suggested by starring work PMI sub-indices.

Taking a 16.7x target PE and applying it to a FY23 EPS of $3.52 based connected statement estimates, nan implied target value comes retired to beryllium $58.8, which corresponds to a 20.5% upside successful nan stock.

Positioning

Overall, I deliberation ABM Industries is simply a bully finance to thrust nan activity of return-to-office trends. I expect a crisp rebound successful nan company's maturation profile, driven by a roaring rebound successful nan starring US Services activity indicators. I expect nan rebound to beryllium sustainable arsenic nan grounds shows agency occupancies are backmost connected nan measurement up, frankincense generating much accommodation guidance business for ABM Industries. Valuations bespeak a discount to humanities trading multiples and to nan broader peer-set, nevertheless I judge this is not warranted fixed nan betterment outlook ahead.

To continuously show nan wellness of my thesis during my finance connected ABM, I will support a adjacent oculus connected nan Services PMIs and agency occupancy numbers. These 2 drivers are halfway to my thesis and a degradation successful these metrics would airs nan biggest risks to my thesis.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

This article was written by

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Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, but whitethorn initiate a beneficial Long position done a acquisition of nan stock, aliases nan acquisition of telephone options aliases akin derivatives successful ABM complete nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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